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Hospital-Based Ambulatory Services: Developing a Business Case

By Jon Graham and Tracy Johnson

As a community hospital needing to expand and reconfigure inpatient services, Jupiter Medical Center (JMC) took a fresh look at how it could-at the same time-reposition and expand its outpatient services in a way that supported the organizational goals of enhanced patient care, increased market presence, and improved financial performance.

This is a sample article from HFMA's Strategic Financial Planning, a subscription-based newsletter that helps senior financial leaders respond to reform and federal/state budget cuts, improve strategic planning, access and allocate capital, identify and respond to risk, and take advantage of growth opportunities.

Outpatient services continue to be one of the faster growing and more profitable service lines for many hospitals, generating a sizable part of the organization's overall profit margin. Despite this, hospitals and systems tend to operate outpatient services as a poor cousin to inpatient services and often fail to leverage the full strategic value.

As hospitals focus on adding new facilities to expand inpatient capabilities and capacity, outpatient services can become even more fragmented and harder to access. Leaders at Jupiter Medical Center determined that a different approach was required in the increasingly complex and financially challenging environment.

The Challenge

The 283-bed Jupiter Medical Center (JMC) in Jupiter, Fla., was facing substantial facility challenges. In addition to the main hospital, which provides the usual range of inpatient and outpatient services distributed across several buildings and floors, JMC includes a variety of outpatient and administrative services scattered in several small satellites nearby. Although there are some small medical office buildings near the campus, medical office space is at a premium in this growing community and is difficult to find.

In 2007, the medical center determined that its campus required significant expansion. This determination was based on a recently completed strategic plan that identified significant opportunity for growth in the market and enhanced financial performance, given the relatively prosperous and growing service area and lack of significant hospital-based competition. The plan identified key initiatives in several high-priority service lines-cardiovascular, orthopedics, oncology, and obstetrics services-and included development of several new programs, including cardiac catheterization and Level II neonatal services. If JMC made the recommended investments in new capabilities and program enhancements, the hospital would need to add as many as 100 more beds and related ancillary capacities in the next five to 10 years.

Based on the recommendations of the strategic plan, JMC developed a master facility plan that called for significant expansion of the main campus to address existing capacity constraints and configuration issues, accommodate the new beds and clinical services, expand support services, and upgrade infrastructure. In addition, hospital leaders wanted to expand fast-growing outpatient services and configure them more effectively, as well as provide additional medical office space.

The space required to accommodate all these services and future growth expectations was initially estimated to be over 400,000 departmental gross square feet (DGSF), nearly double the 220,000 DGSF currently available, plus additional parking, a new central plant, and improved circulation on the site. Two major concerns were the site constraints and inconvenience that would be created by limited parking and access during construction, especially for outpatients.

Financial planning estimated the capital costs for the campus expansion and renovations at $150 million. As a not-for-profit community hospital, JMC has three sources of capital: philanthropy, debt, and cash. During 2008, the bond markets became unavailable and the donor community became cautious about committing to large gifts, leaving inadequate cash to fund the required projects.

A New Approach

So JMC stepped back, looked at the broad, strategic picture, and recognized that the need for beds, the availability of real estate, the growth in outpatient services, and physician interest in partnering with the medical center could be leveraged to reduce costs and facilitate the implementation of key elements of the master plan.

The medical center already leased space in a satellite location less than one mile from the campus, which had ample room for expansion in an attractive and accessible location with plenty of parking. Services already provided by JMC at this site include ambulatory surgery, endoscopy, pain management, and outpatient imaging. Would relocating more outpatient services from the hospital to the off-site location support the organization's overall strategic goals and increase the feasibility of the overall master plan?

The process of answering that question included the following steps:

Assemble and review a list of all current outpatient services provided at the medical center (see exhibit 1)

Identify and evaluate opportunities to shift services off site based on the interest of physicians, ability to schedule patients, synergies with complementary services, likely financial contribution, and other factors.

Refine the list of services to be considered.

Identify financing alternatives, including a joint venture with a developer for additional space.

Develop a financial pro forma for off-site development.

Determine the impact on expansion requirements at the main campus.

Exhibit 1

The Business Case

The refined list of services to be located at the expanded ambulatory care center included additional outpatient surgery, preadmission testing, and imaging from the main campus, as well as the complete relocation of pediatric rehabilitation, cardiac rehabilitation, occupational health services, and pain services (as part of an expanded multidisciplinary pain program).

Urgent care services, in conjunction with occupational health, were also planned for the new expansion, which would decompress the emergency department at the main campus, generate new business for imaging services, and provide physician coverage for the cardiac rehabilitation program. The addition of physician office space would accommodate complementary specialty practices and generate greater traffic for the outpatient center.

The first phase of expansion would also include the integration of women's imaging and a breast center to be relocated from another off-site location. Consolidating the smaller programs would increase scale and operational efficiencies for imaging and allow the women's center to provide additional services in a more integrated manner. For instance, breast biopsies could be performed in the ambulatory surgery center at the same site, instead of transporting patients several blocks to the hospital from the existing breast center as is done currently.

JMC held discussions with a local developer who could finance the cost of the expansion and lease the space back to the hospital. The ability to expand volumes and revenues, reduce operating costs, and develop alternative financing sources led to a positive financial forecast for the expanded outpatient center. The revenues generated would, in turn, help finance the new construction needed at the main campus.

Relocating outpatient services reduced diagnostic and treatment expansion requirements at the hospital by nearly 20 percent, or 24,000 DGSF (see exhibit 2). It also led to development of a smaller, more affordable first phase of campus development, including a bed tower that could still be supported by the remaining ancillary and surgical capacity at the hospital.

Exhibit 2

But the relocation and development of select outpatient services from the main campus to the expanded satellite will also strengthen JMC's market position and financial performance by:

Increasing the ability to grow profitable outpatient services

Enhancing programmatic and clinical synergies

Providing a better outpatient experience, environment, and access

Improving operational efficiencies

Developing opportunities to partner with physicians and increase loyalty through equity partnerships and the provision of office space

Reducing the amount of expansion required at the main campus and related capital costs

Improving the organization's financial performance and reducing its financial risk

Lessons Learned

Several key factors contributed to making the typical planning process more robust and dynamic.

Broad strategic perspective

Someone in the organization must be charged with the responsibility to think strategically, typically the CEO and the executive responsible for planning. Although strategic planning must be a collaborative process to benefit from a broad range of perspectives among executives, the board, and medical staff, many hospital administrators are focused on day-to-day operational issues. To ensure that the organization does not lose sight of its overall goals, individuals with the time and aptitude for considering the overall strategic picture-and who also understand the interrelationships of the various programs and functions in the organization-must be at the table.

Multiple strategies

Able to execute and financially support only a select number of initiatives, healthcare executives are often faced with the difficult task of choosing among multiple strategies, each important in its own right. This medical center stepped back, looked at the broad strategic picture, and recognized that the need for beds, the availability of real estate, the growth in outpatient services, and physician interest in partnering with the medical center could be acted on simultaneously in a coordinated manner.

Complex interrelationships

The organization must study and understand not only the complex interrelationships between its functional structures (e.g., radiology, nursing, finance), but also the relationships between these functions and programmatic requirements (e.g., how nursing, radiology, and finance interact to create a women's center of excellence).

One reason why the expansion of the outpatient facility was so attractive was the ability to create synergy among several different services. Development of an urgent care center and relocation of women's services and occupational medicine will each drive imaging volume to the new facility and further relieve pressure at the main campus. The physician offices will do the same, while allowing the medical center to partner with important members of the medical staff. Functionally, emergency medicine, radiology, and nursing all work across the service boundaries and must collaborate to make the programs successful.

System thinking

To grasp the strategic implications and opportunities at a conceptual level, hospital leadership, the board, and the medical staff need to understand the organization as a system of departments, physicians, patients, suppliers, and others functioning in an interrelated manner. Knowing that growing one part of the system (e.g., beds) requires adequate resources to support that growth (e.g., physicians and medical office space) and has implications for other parts of the organization (e.g., more imaging, more space) requires a system perspective.

For JMC, what appeared to be an untenable situation of facility constraints turned into a successful initiative that was compatible with the organization's strategic plan and proactively managed during difficult economic conditions. While ambulatory care services often garner only secondary attention from hospital leaders, as this medical center proved, they can play a pivotal role in the overall financial health of hospitals and systems.

As a community hospital needing to expand and reconfigure inpatient services, Jupiter Medical Center (JMC) took a fresh look at how it could-at the same time-reposition and expand its outpatient services in a way that supported the organizational goals of enhanced patient care, increased market presence, and improved financial performance.

This is a sample article from HFMA's Strategic Financial Planning, a subscription-based newsletter that helps senior financial leaders respond to reform and federal/state budget cuts, improve strategic planning, access and allocate capital, identify and respond to risk, and take advantage of growth opportunities.

Outpatient services continue to be one of the faster growing and more profitable service lines for many hospitals, generating a sizable part of the organization's overall profit margin. Despite this, hospitals and systems tend to operate outpatient services as a poor cousin to inpatient services and often fail to leverage the full strategic value.

As hospitals focus on adding new facilities to expand inpatient capabilities and capacity, outpatient services can become even more fragmented and harder to access. Leaders at Jupiter Medical Center determined that a different approach was required in the increasingly complex and financially challenging environment.

The Challenge

The 283-bed Jupiter Medical Center (JMC) in Jupiter, Fla., was facing substantial facility challenges. In addition to the main hospital, which provides the usual range of inpatient and outpatient services distributed across several buildings and floors, JMC includes a variety of outpatient and administrative services scattered in several small satellites nearby. Although there are some small medical office buildings near the campus, medical office space is at a premium in this growing community and is difficult to find.

In 2007, the medical center determined that its campus required significant expansion. This determination was based on a recently completed strategic plan that identified significant opportunity for growth in the market and enhanced financial performance, given the relatively prosperous and growing service area and lack of significant hospital-based competition. The plan identified key initiatives in several high-priority service lines-cardiovascular, orthopedics, oncology, and obstetrics services-and included development of several new programs, including cardiac catheterization and Level II neonatal services. If JMC made the recommended investments in new capabilities and program enhancements, the hospital would need to add as many as 100 more beds and related ancillary capacities in the next five to 10 years.

Based on the recommendations of the strategic plan, JMC developed a master facility plan that called for significant expansion of the main campus to address existing capacity constraints and configuration issues, accommodate the new beds and clinical services, expand support services, and upgrade infrastructure. In addition, hospital leaders wanted to expand fast-growing outpatient services and configure them more effectively, as well as provide additional medical office space.

The space required to accommodate all these services and future growth expectations was initially estimated to be over 400,000 departmental gross square feet (DGSF), nearly double the 220,000 DGSF currently available, plus additional parking, a new central plant, and improved circulation on the site. Two major concerns were the site constraints and inconvenience that would be created by limited parking and access during construction, especially for outpatients.

Financial planning estimated the capital costs for the campus expansion and renovations at $150 million. As a not-for-profit community hospital, JMC has three sources of capital: philanthropy, debt, and cash. During 2008, the bond markets became unavailable and the donor community became cautious about committing to large gifts, leaving inadequate cash to fund the required projects.

A New Approach

So JMC stepped back, looked at the broad, strategic picture, and recognized that the need for beds, the availability of real estate, the growth in outpatient services, and physician interest in partnering with the medical center could be leveraged to reduce costs and facilitate the implementation of key elements of the master plan.

The medical center already leased space in a satellite location less than one mile from the campus, which had ample room for expansion in an attractive and accessible location with plenty of parking. Services already provided by JMC at this site include ambulatory surgery, endoscopy, pain management, and outpatient imaging. Would relocating more outpatient services from the hospital to the off-site location support the organization's overall strategic goals and increase the feasibility of the overall master plan?

The process of answering that question included the following steps:

Assemble and review a list of all current outpatient services provided at the medical center (see exhibit 1)

Identify and evaluate opportunities to shift services off site based on the interest of physicians, ability to schedule patients, synergies with complementary services, likely financial contribution, and other factors.

Refine the list of services to be considered.

Identify financing alternatives, including a joint venture with a developer for additional space.

Develop a financial pro forma for off-site development.

Determine the impact on expansion requirements at the main campus.

Exhibit 1

The Business Case

The refined list of services to be located at the expanded ambulatory care center included additional outpatient surgery, preadmission testing, and imaging from the main campus, as well as the complete relocation of pediatric rehabilitation, cardiac rehabilitation, occupational health services, and pain services (as part of an expanded multidisciplinary pain program).

Urgent care services, in conjunction with occupational health, were also planned for the new expansion, which would decompress the emergency department at the main campus, generate new business for imaging services, and provide physician coverage for the cardiac rehabilitation program. The addition of physician office space would accommodate complementary specialty practices and generate greater traffic for the outpatient center.

The first phase of expansion would also include the integration of women's imaging and a breast center to be relocated from another off-site location. Consolidating the smaller programs would increase scale and operational efficiencies for imaging and allow the women's center to provide additional services in a more integrated manner. For instance, breast biopsies could be performed in the ambulatory surgery center at the same site, instead of transporting patients several blocks to the hospital from the existing breast center as is done currently.

JMC held discussions with a local developer who could finance the cost of the expansion and lease the space back to the hospital. The ability to expand volumes and revenues, reduce operating costs, and develop alternative financing sources led to a positive financial forecast for the expanded outpatient center. The revenues generated would, in turn, help finance the new construction needed at the main campus.

Relocating outpatient services reduced diagnostic and treatment expansion requirements at the hospital by nearly 20 percent, or 24,000 DGSF (see exhibit 2). It also led to development of a smaller, more affordable first phase of campus development, including a bed tower that could still be supported by the remaining ancillary and surgical capacity at the hospital.

Exhibit 2

But the relocation and development of select outpatient services from the main campus to the expanded satellite will also strengthen JMC's market position and financial performance by:

Increasing the ability to grow profitable outpatient services

Enhancing programmatic and clinical synergies

Providing a better outpatient experience, environment, and access

Improving operational efficiencies

Developing opportunities to partner with physicians and increase loyalty through equity partnerships and the provision of office space

Reducing the amount of expansion required at the main campus and related capital costs

Improving the organization's financial performance and reducing its financial risk

Lessons Learned

Several key factors contributed to making the typical planning process more robust and dynamic.

Broad strategic perspective

Someone in the organization must be charged with the responsibility to think strategically, typically the CEO and the executive responsible for planning. Although strategic planning must be a collaborative process to benefit from a broad range of perspectives among executives, the board, and medical staff, many hospital administrators are focused on day-to-day operational issues. To ensure that the organization does not lose sight of its overall goals, individuals with the time and aptitude for considering the overall strategic picture-and who also understand the interrelationships of the various programs and functions in the organization-must be at the table.

Multiple strategies

Able to execute and financially support only a select number of initiatives, healthcare executives are often faced with the difficult task of choosing among multiple strategies, each important in its own right. This medical center stepped back, looked at the broad strategic picture, and recognized that the need for beds, the availability of real estate, the growth in outpatient services, and physician interest in partnering with the medical center could be acted on simultaneously in a coordinated manner.

Complex interrelationships

The organization must study and understand not only the complex interrelationships between its functional structures (e.g., radiology, nursing, finance), but also the relationships between these functions and programmatic requirements (e.g., how nursing, radiology, and finance interact to create a women's center of excellence).

One reason why the expansion of the outpatient facility was so attractive was the ability to create synergy among several different services. Development of an urgent care center and relocation of women's services and occupational medicine will each drive imaging volume to the new facility and further relieve pressure at the main campus. The physician offices will do the same, while allowing the medical center to partner with important members of the medical staff. Functionally, emergency medicine, radiology, and nursing all work across the service boundaries and must collaborate to make the programs successful.

System thinking

To grasp the strategic implications and opportunities at a conceptual level, hospital leadership, the board, and the medical staff need to understand the organization as a system of departments, physicians, patients, suppliers, and others functioning in an interrelated manner. Knowing that growing one part of the system (e.g., beds) requires adequate resources to support that growth (e.g., physicians and medical office space) and has implications for other parts of the organization (e.g., more imaging, more space) requires a system perspective.

For JMC, what appeared to be an untenable situation of facility constraints turned into a successful initiative that was compatible with the organization's strategic plan and proactively managed during difficult economic conditions. While ambulatory care services often garner only secondary attention from hospital leaders, as this medical center proved, they can play a pivotal role in the overall financial health of hospitals and systems.

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